I.Introduction
to spectrum licenses

Since the late 1920’s, the need to regulate the
broadcast
of radio signals into the ether has became apparent.This
is due to a fundamental property of radio waves.As
multiple radio operators attempted to use the same, limited number of
frequencies,
their signals cause interference, the waves amplifying canceling one
another
out.The result was that no one could
clearly broadcast or receive.The
need to regulate the airwaves has been accomplished with a variety of
allocation
policies, including give-aways, beauty contests, and eventually
auctions.

Today in most countries, a central
regulator
assigns bands of adjacent frequencies to particular applications, then
allocates the exclusive right to those frequencies to minimize the
problem
of interference.In most cases, the
regulator holds an auction to ensure the economic allocation of this
scare
resource.Potential wireless providers
do not actually bid for spectrum, but rather a license granted by the
government
to the exclusive right to emit electromagnetic waves, into the ether at
a given frequency power lever in a specified geographic location.In
such auctions, potential providers place bids which they are willing to
pay to obtain the licenses, with the highest bidders obtaining the
licenses.In
the auctions conducted by the Federal Communications Commission (FCC),
license fees must be paid prior to the beginning of the license which
license
lasts for a period of years, typically 6 to 15 years.At
the end of the licensee, the government may reassign the right to use
the
frequency.Once a wireless provider
has won a license at auction, it may be bound to provide service and to
pay the license fees whether it operates or not.It
may further be restricted from reselling the license.Most
recently, there have been auctions for licenses to provide 3G wireless
services in Europe, Japan, Oceania, and the US.The
recipients of licenses in these auctions must then make further capital
investments in network infrastructure to provide these services.

Since this exclusive
right,
by definition, lasts for a period greater than one year, it gives rise
to the need to account for the licenses as a long-lived asset.It
is not unlike the accounting for any other intellectual asset, such as
a patent, which a firm acquires through purchase.Through
this accounting, the wireless communications provider is able to track
the flow of cash versus the flow of wealth, as the firm (hopefully)
generates
wealth for its shareholders.

II.Principle
Accounting Policies

A.Long-lived
assets

Any asset which has a useful life greater than
one
year or one accounting period is considered a long-lived asset.This
accounting construct is predicated on the thinking that the period in
which
cash is outlaid to acquire the asset will be different from the period
in which it will produce benefits.Management
must decide how to measure the costs and benefits associated with the
asset
in order to track the flow of wealth across accounting periods.This
is an area of much managerial discretion; however, the manger’s
principle
aim is to match the cost of a benefit with the time period in which it
generates revueThe cost of the asset
used in a particular period is its expense, while the value which is
not
applied to the period and remains on the balance sheet is the
capitalized
cost.Costs deemed expenses flow
through the income statement, while capitalized costs appear on the
balance
sheet.

B.Deciding
expense and capitalization

The cash used to acquire a spectrum license is its
accounting cost.The decision how
much to expense or capitalize is an accounting decision.It
affects net income but does not appear on the statement of cash flows.This
is because the cash is paid out depending only at the acquisition cost
of the license.The value of the
spectrum which the carrier has on it balance sheet is its book value.The
book value can be greater or less than the value the market places on
the
asset.In the case of spectrum licenses,
there is no secondary market in which to resell the license.In
fact, this remains a sunk cost and the license usually requires for the
obligation to offer service, so there is no ability to exit the market.The
acquisition cost, less accumulated amortization, is the only way to
value
the license.

However, since there
is some
discretion in setting amortization, the carrier may have some latitude
creating valuation for the balance sheet.To
do so, management must select an appropriate amortization.Amortization
is an accounting means of measuring how much of the asset is used up in
a given period.The goal is to match
how much of the asset is used up with that time period and the period
when
revenues are generated.There are
three methods: straight line, declining balance and units of
production.

For spectrum, the
product
(cellular telephone capacity) which the asset can generate is solely a
function of time.Every second that
passes, whether or not the wireless provider is selling service to an
end
user, it is consuming the asset of the license.Thus,
the consumption of the asset can only measured by use of the duration
of
the license period as it passes.Because
there is a finite capacity of the spectrum, no more or less is used in
producing individual units.Therefore,
the units of production method of amortization is conceptually the same
as straight-line, save for maybe an increment of months or quarters
versus
minutes or seconds.

Declining balance is
preferable
when a firm will incur greater maintenance and operational costs in the
equipment’s useful life.This matches
a lesser book value of the asset with its less productive later stage.The
cellular gear, switching, and trunking equipment necessary to provide
service
may become more expensive to operate as it gets older.Such
assets may require upgrades and maintenance and is subject to rapid
obsolescence,
but this does not apply to the spectrum itself.The
spectrum is no less productive later in its useful life.In
fact, the reverse seems to be true.New
equipment allows for increased capacity over the same amount of
spectrum.Since
there is a preference for straight-line amortization, it is the most
appropriate
means.

C.A
word on steady state.

A firm achieves a steady state after it is gone
through
one full life cycle of its PP&E assets.In
a steady state, the firm is replacing these assets at the same rate in
which on-balance-sheet assets reach the end of their useful life.In
the steady state, assuming it is accurately estimated, depreciation and
amortization are equal to investment in new PP&E.The
spectrum has no useful life, but rather a finite duration determined
solely
by the length of the license.Thus
there is no steady state for this asset.However,
the wireless provider uses a set aside provision or contra-asset to
purchase
license renewals in later auctions after the current license expires,
it
is building an off-balance-sheet liability.

III.Conclusion

Without having a set sides or a contra account on
the balance sheet, the wireless provider develops a future liability
which
is not shown on the balance sheet.The
wireless provider runs the risk of investing in network infrastructure
it may not be legally permitted to operate in future.Moreover,
it develops a future off-balance-sheet liability, the need to purchase
subsequent spectrum licenses.In
such a case, it may not be setting a side sufficient reserves and over
stating earnings.Thus, the cash
which the provider pays to its shareholders in dividends may be greater
than the actual wealth it is creating for those owners.